Short-selling can be defined as the method in which one sells the stock that he or she does not possess at the time of selling them. It is done in the hope that the price of that stock will go down, and the person who has done short selling will be profited by buying back those shares at a lower price. Short selling is usually done by Hedge Fund, Large Institutions, Traders and Very High Net worth Individuals.
Q. How does one make profit or loss by doing short selling?
Ans. Now the question is how can one make profit or incur loss by doing short selling well here is the answer For example your shorted 2000 shares of Microsoft at price of 20$ and it rose to 22$, then you have to buy back those shares at 22$ and your loss will be 4000$ and hence it can seen that if you short sell a stock and it rises then one is in big problem and he or her has to take the loss. In the same way if one has shorted a 2000 shares of Microsoft at price 20$ and it went down to 18$, then one can buy those 2000 shares at 18$ and can make profit of 4000$ so if in case one has shorted the stock and its price move down he will make profit on short selling.
Short selling can be of two types one is called naked short selling in which the seller does not intend to provide for the delivery of shares he or she has sold and other is called Covered short sales in which the seller arranges for the delivery of shares he or she has sold by borrowing them.